How did Texas distinguish taxable software sales and modifications from nontaxable programming, training, and computer consulting?

Plain-English summary

The Comptroller gave general guidelines and then answered a long series of examples. A completed computer-program sale was taxable, including combining modules into a new program or modifying an existing program. When the provider sold the program, modification, installation, and maintenance charges were taxable. Separately stated instruction was nontaxable, and the letter also said not to collect on charges to create a program or modify a program the provider did not sell.

The examples repeatedly distinguished the seller's own software from someone else's software. Modifying a program previously sold by the provider was taxable; fixing a program written by another person was nontaxable. Training was nontaxable, including computer-use training and training on retail software, but taxable modifications had to be separately charged.

Computer-needs consultation and a separately billed written description of the consultation were nontaxable. Other charges connected to a taxable program sale—including certain design, programming, testing, documentation, manuals, and consulting—were taxable under the specific examples. Running an existing conversion program without modification became taxable data processing January 1, 1988.

Revisions shipped to an Alabama office were nontaxable if each revision was separately charged and out-of-state shipment was documented. If copies returned to a Texas office, the customer accrued use tax. A retailer buying programs for resale could issue a resale certificate.

What this means for you

The historical letter turns on what was sold, who originally sold the program, how charges were separated, and where the product was delivered or used. Its many examples are more reliable than treating “programming” or “training” as one uniform category.

Common questions

Was modifying the provider's own previously sold program taxable? Yes.

Was fixing software written by someone else taxable? No, under the letter.

Was computer training taxable? No, when separately stated from taxable charges.

Was a consultation about hardware and software needs taxable? No, if separately stated from taxable charges; the written description of that consultation was also nontaxable.

Were all program-creation charges treated the same? No. The general guidelines say not to tax charges to create a program, while later examples tax total or bundled charges where a completed program or modified commercial program was sold. The transaction details matter.

How was data conversion treated? Running an existing conversion program without modification became taxable data processing January 1, 1988.

What about out-of-state revisions? Separately charged revisions shipped out of state were nontaxable with documentation; copies used in Texas triggered customer use tax under the example.

Citations and references

• The letter refers to a newly published computer-programming rule but does not identify it by number in the body.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8712L0851B10

Original ruling text

Bob Bullock
Comptroller of Public Accounts
Austin, Texas 78774

December 30, 1987

Dear *****:

Senator ***** sent me a copy of your letter of September 24, 1987.

I apologize for the delay in answering your letter. My records show we
sent
you a postcard at the end of September, acknowledging your letter and
letting
you know we'd get you an answer as soon as possible.

I asked the folks in my Tax Policy Division to look into the delay. They
tell me the industry had many comments on how to tax contract
programming.
And a rule has just been published with guidelines on when to collect
tax.
I'm enclosing a copy.

I've restated these guidelines before answering your questions.

You should collect tax when you sell a completed computer program. This
includes combining several program modules into a new program, or
modifying
an existing program.

When you sell a completed program, you should collect tax on charges for
modification, installation, or maintenance of the program.

Don't collect on separately stated charges for instruction.

Don't collect tax on charges to create a program.

Don't collect tax on charges to modify a program you didn't sell.

Here are your questions and the answers.

Question: I am called upon to make a change in a program I have written
in
the past. I bill by the hour. Is this taxable?

Answer: Yes, modification of a program you sold is taxable.

Question: I am called upon to fix a program written by someone else. I
bill
by the hour. Is this taxable?

Answer: No.

Question: I am paid by the hour to train someone in the use of
computers,
such as formatting diskettes, copying files, caring for equipment, and
buying
supplies. Is this taxable?

Answer: Training is not taxable.

Question: I am paid by the hour to help someone who has written a
computer
program for their business use. I train them in BASIC by providing from
my
general knowledge while revising the program, sometimes doing it myself,
sometimes suggesting problem points for him to work on. Is this work
taxable?
Is this partly taxable, if the proportion of programming to training can
be
determined?

Answer: The training is not taxable. If you modify a program you sold,
you
should separate that charge and collect tax.

Question: I am paid by the hour to work with someone using Lotus 123
during
which time I train them in the use of 123 and help them solve problems
related
to their business by building spreadsheet models using my programming
knowledge.
Is this payment taxable?

Answer: The training is not taxable. If you modify a program you sold,
you
should separate that charge and collect tax.

Question: I am paid by the hour to write a Lotus 123 spreadsheet which
will
carry out a specific task, for which I am responsible for design and
coding,
as I am when I work in BASIC. Is this payment taxable?

Answer: If you sold the Lotus 123, you should collect tax on your total
charge.

Question: I am paid by the hour to write a payments management program,
but it must be written using the already existing commercial program
Dbase
III. I am asked to buy Dbase III, to design and code the program and
deliver
to the client.

Answer: You are selling a program and modifying it. This is taxable.

Question: Do I have to pay sales tax on Dbase III?

Answer: You may give your supplier a resale certificate in lieu of tax.
Your total cost to your client will be taxable, except separately stated
charges for training.

Question: I spend two hours meeting with a client to discuss computer
hardware and software needs.

Answer: This consultation is not taxable, if the fee is separately
stated from taxable charges.

Question: At the conclusion of the meeting, the client asks that I
prepare a
written description of what we have concluded and that I bill him for the
time
of writing.

Answer: This fee is not taxable.

Question; I prepare an outline of programs, showing how long it will take
to
develop them. The estimated cost of each, and the questions still to be
an-
swered before final planning of programs can be done. Is it taxable?

Answer: If the program you sell is taxable, this charge is also taxable.

Question: When the first phase of programming is approved, I spend 20
hours
designing, programming and testing the system. Before delivery of the
program,
I spend 10 hours writing complete instructions for use of the programs.
Is
this time taxable?

Answer: If the program you sell is taxable, these fees are also taxable.

Question: After delivery of the program, I hold training sessions to
explain
to the users how the program works.

Answer: This fee is not taxable, if separately stated.

Question: Another office adopts the software and I do 2 hours work
adapting
it.

Answer: You are modifying software you sold, this fee is taxable.

Question: The other office needs training, but I am not available. I
recommend someone from the first office.

Answer: Training is not taxable.

Question: The second office wants the instructions rewritten to allow for
the lower educational level and different products they have.

Answer: The charge for the manual is taxable.

Question: The new office requires new data, which has been entered by
the
staff or the original office using Appleworks. I take the program I used
to
convert the data for the original program and without modification run it
to convert the data for the new office.

Answer: This will be taxable January 1, 1988, as data processing.

Question: I have a client who is moving his office from Dallas to
Birmingham,
Alabama. I will continue to provide maintenance for existing programs by
making
revisions and mailing the changes.

Answer: If you charge for each new revision, no tax will be due. But
keep
documentation that you shipped the revisions out of state.

Question: This person may maintain his office here with another worker.
If
the person ships copies and some of the programs back here, is any of the
work taxable?

Answer: Your customer should accrue use tax on the revisions.

Question: I write a bid for a combination of training, writing programs,
writing documentation and consulting on problems. This bid calls for pay-
ment of one-third of the total fee of $630 before October 1 and
two-thirds
when the work is done satisfactorily which will be after October 1. What
is
tax due on?

Answer: If your work will be taxable (using the guidelines given), you
should separate your charges for nontaxable items (training) from your
charge for taxable items. The sale occurs when the customer takes pos-
session or title to the program. You should collect tax on your fee for
writing the program, documentation and consulting.

Question: I agree to write a set of computer programs which are going to
be resold as a retail package. Do I get a tax exempt form from the firm
that hires me and thus not collect taxes from them?

Answer: The retailer may give you a resale certificate in lieu of tax if
he is going to resale the programs.

Question: I am called to provide training in an office for the program
which is being sold at retail. Do I collect sales tax?

Answer: Charges for training are not taxable.

Question: I am called to provide training in an office for a program
which
I did not write which is being sold at retail. Do I collect sales tax?

Answer: Not taxable.

If you have any questions or need more information, please call the Tax
Policy Division. The toll-free number is 1-800-531-5441. The regular
number is 512/463-4600.

Sincerely,
BOB BULLOCK
Comptroller of Public Accounts